This article was reviewed by Jay Brecknell, CFP®.
For most Millennials, the thought of retirement can seem like light years away. While a lot can and will happen between now and then, ignoring it or putting a plan on the back burner is a major mistake. In a constantly evolving society, Generation Y faces unique challenges compared to those faced by previous generations. For this age group (18- to 34-year-olds), gaining an understanding of their financial situation and potential hurdles is critical.
Take advantage of compound interest
When it comes to the question of being able to retire one day, the biggest advantage Millennials have on their side is time. They are generally considered to be anywhere from 30 to 45 years away from retirement. The most important benefit to their age bracket is the opportunity to take advantage of compound interest.
Defined as interest on top of interest or earnings on earnings, compound interest is in direct correlation with time, and understanding its power is key for Millennials hoping to retire one day. In other words, when it comes to saving money, the sooner the better.
Illustrating compound interest
Let’s take Joe and Sally as an example.
Suppose Joe, at 30 years old, decides that now is the time he will commit to saving for retirement.
Joe puts aside a modest $500 per month into a tax sheltered investment vehicle, such as a RRSP or TFSA. Let’s assume that Joe plans to retire at age 65 and earns an average annual rate of return of 6%. By the time Joe is 65, his retirement savings would sit at $690,145.
Sally decides, at age 25, that she is also going to commit $500 each month to retirement.
All else being equal, at age 65, Sally’s retirement savings would be a whopping $958,481 simply because she started saving at age 25 instead of 30.
By starting 5 years sooner than Joe, Sally invested a total of only $30,000 more (5 years x $500 per month = $30,000) but ended up with almost $300,000 more by retirement! This demonstrates that by committing to saving early, even if it is just in small amounts, a Millennial can take advantage of the power of compound interest.
Start saving early
Millennials may face some unavoidable challenges, such as the rising cost of tuition and the resulting increase in student loan debt, or the inability to rely on government-assisted retirement programs such as CPP and OAS. Another issue is the dwindling existence of employer-sponsored pension plans, as working for the same company throughout a career has become somewhat of a rarity.
These potential obstacles emphasize the importance of being proactive and having a plan. It is now more critical than ever that Generation Y commits more responsibility and takes their retirement goals into their own hands.
Will Generation Y ever retire? The answer is: If it’s meant to be, it’s up to me.
- Seek qualified advice
- Observe older generations
- Commit early and be consistent
- Let your money work for you
- Time is on your side, don’t miss out
Want help assessing or discussing your (or a younger family member’s) retirement plan? Don’t hesitate to reach out today.